Tougher compliance rules for New Zealand foreign trusts

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New Zealand’s Parliament has approved legislation that will require foreign trusts to disclose more information to the tax authorities as it gets tough on aggressive tax planning in the wake of the Panama Papers.

The Taxation (Business Tax, Exchange of Information, and
Remedial Matters) Bill passed its third reading on February
14. It will enter into force on the date it receives Royal
Assent, which is anticipated to be in the coming days.

"Trustees of foreign trusts should talk to their advisers to
gain a full understanding of the rules and will need to assess
how the rules may impact on the administration of affected
trusts," said Tim Stewart, senior solicitor at Russell McVeagh
in New Zealand. "The rules will require trustees to hold, and
disclose to Inland Revenue, information such as the trust deed,
contact details, jurisdiction of tax residence, and the tax
identification number of each settlor and each trustee. On an
on-going basis, [trustees must share] the financial statements
of the trust, details of any further settlements, and the
details of distributions and the beneficiaries receiving those
distributions."

"The new legislation tightens the disclosure rules for
foreign trusts as recommended by the Shewan Inquiry," Revenue
Minister Judith Collins said in a statement. The rules intend to deter
offshore parties from using New Zealand trusts for illicit
purposes and provide a clear signal about the importance of
complying with the disclosure rules.

Former PwC New Zealand chairman, John Shewan, recommended
changes in an independent inquiry report published on June 27
2016. The government commissioned the inquiry after its rules
for foreign trusts were deemed to be inadequate following
the Panama Papers revelations in April
2016. The scandal asserted that New Zealand foreign trusts were
being used extensively by wealthy individuals to either avoid
or evade tax, facilitate aggressive tax planning or launder
money.

"Strengthened disclosure requirements on registration of a
foreign trust along with the requirement to file an annual
return will give Inland Revenue greater information about
foreign trusts in New Zealand," said Stewart. "Such information
may be shared with the authorities in other countries under
double taxation agreements, tax information exchange agreements
and the Convention on Mutual Administrative Assistance in Tax
Matters, which will significantly increase the prospects of
detection of any evasion that might be occurring."

Politicians claim legislation is weak

Although the new legislation implements a strict compliance
criteria for foreign trusts, politicians from opposition
parties said it falls short of the necessary changes and a
public searchable register for foreign trusts should have been
introduced.

During the parliamentary debate on the third reading of the
bill Grant Robertson, Labour MP for Wellington Central, said
that although "we will actually be able to see who the trustees
are, who the settlers are, who the beneficiaries are, and where
they are coming from … we believe we should aim for the
highest-possible levels of transparency".

"That means a searchable public register. We do it for
charitable trusts and we do it for companies; there is
absolutely no reason why we should not shine the light on what
is going on here, and do that when it comes to foreign trusts,"
Robertson said.

Barry Coates, an MP for the Green Party of Aotearoa New
Zealand, added that the legislation fails to provide the
"antidote" to hot money, tax evasion and other forms of
international regulation. "Unfortunately, the
device—the mechanism—that is included in this
bill for foreign trusts is a register that is limited in its
transparency," he said. "There is an insufficient basis for
being able to understand what these foreign trusts are doing in
New Zealand. I think that is a huge missed opportunity with
regard to this bill. We need to crack down on tax havens."

Several other MPs from the Labour and Green political
parties echoed similar views.

However, Stewart said politicians are missing the point of
why these changes were introduced. "The suggestion that a
public register be established perhaps misconstrues what is
necessary to achieve transparency in the tax context. The move
towards greater transparency, in which New Zealand has actively
participated, is intended to prevent assets and income from
being concealed from the relevant tax authorities. This does
not require a public register, but does require the relevant
information to be available to be exchanged with the relevant
tax authorities. The changes made in the bill achieve this
objective."

Registration required by all trusts

Regardless of the debate over transparency, foreign trusts
will be required to formally register with Inland Revenue under
the new rules.

The registration requirement will apply to all trusts
established after the bill receives Royal Assent, which must
supply the required information to Inland Revenue within 30
days of being formed.

In addition, all existing foreign trusts will be required to
meet the new information requirements by June 30 2017. "Well
before that date, trustees should ensure they have, and will
continue to have, access to the required information and that
they can honestly give the declaration required to register,"
said Stewart.

Registration will cost trusts NZ$270 ($193) and a further
annual filing fee of NZ$50 paid to Inland Revenue. Failure to
register will result in the foreign trust losing its exemption
from New Zealand tax.

This means that a foreign trust that fails to meet these
requirements will be taxable in New Zealand on its worldwide
income, introducing a sanction for non-registration.

Inland Revenue will share information contained in the
foreign trusts register, for law enforcement purposes, with the
Department of Internal Affairs and the New Zealand police once
the bill is enacted.

Disclosures and annual filing requirements

The registration process also comes with a number of
additional disclosure requirements.

On registration, the names, e-mail addresses, foreign
residential addresses, country of tax residence, and taxpayer
identification numbers of all those associated with the trust
have to be declared to Inland Revenue, including for:

The settlor(s);

The protector (if there is any);

Non-resident trustees;

Any other natural person who has effective control of the
trust;

Beneficiaries of fixed trusts, including the underlying
beneficiary where a named beneficiary is a nominee; and

Each person with a power under the trust deed to control
the dismissal or appointment of a trustee, to amend the trust
deed, or to add or remove a beneficiary.

The registration process will also require the trust to
declare that the individuals establishing the foreign trust,
the settlor(s), and the trustees have all been advised of, and
have agreed to comply with the applicable requirements in the
Tax Administration Act 1994, Anti-Money Laundering and
Countering Financing of Terrorism Act 2009 and associated
regulations, and the automatic exchange of tax information
requirements proposed in the Taxation (Business Tax, Exchange
of Information, and Remedial Matters) Bill.

The changes also require the deed of the trust to be filed
with the registration form, and that, discretionary trusts are
required to describe in the registration any class of
beneficiary not listed in the trust deed.

For registered foreign trusts, annual returns would have to
be filed with Inland Revenue, which would have to include:

Any changes to the information provided at
registration;

The trust’s annual financial statement;
and

The amount of any distributions paid or credited,
including the names, foreign address, taxpayer identification
number, and country of tax residence of the recipient
beneficiaries.

"Qualifying resident foreign trustee" exemption removed

The bill also repeals the "qualifying resident foreign
trustee" definition in the Tax Administration Act 1994 and the
attached tax exemption. To be a "qualifying resident foreign
trustee", the trustee must be a member of a specified
professional body.

The change would mean that foreign trusts would lose their
New Zealand tax exemption if a "qualifying resident foreign
trustee" is guilty of an offence.

Other measures

The legislation also includes a number of additional tax
measures, such as:

Implementing the common reporting standard (CRS) and the
automatic exchange of financial account information in tax
matters (AEOI);

Amending FATCA implementation legislation to align the
FATCA anti-avoidance rule with the AEOI anti-avoidance rule,
and align the obligations and penalties for non-financial
institutions that must comply with FATCA and the AEOI;

Introducing specific record-keeping requirements for
financial institutions under an anti-avoidance provision that
applies to arrangements and practices entered into or by
financial institutions, persons, or intermediaries with "a
main purpose" of circumventing CRS due diligence or reporting
requirements;